A look at the day ahead in the US and global markets from Mike Dolan
After a roaring Thursday in which Wall Street stocks got a big boost from the Federal Reserve's input into a still-healthy economy, there's a modest pullback today and eyes on other central banks that are deciding to hold off on making changes for now.
Taking different policy directions, the central banks of Japan and China decided to keep their interest rates unchanged on Friday (the latter slightly surprisingly given the alarming slowdown in their economies).
The People's Bank of China unexpectedly left monthly interest rates unchanged, confounding forecasts after the Fed's massive 50-basis-point cut on Wednesday. Nearly 70% of market participants surveyed earlier in the week had forecast a cut.
Whether this is simply a delay to synchronise with broader stimulus plans later is a moot point, but – perhaps damagingly for China – it has lifted the offshore yuan to a new 16-month high.
Less surprisingly, the Bank of Japan also left its monetary policy settings unchanged on Friday, refraining from further tightening for now even as it upgraded its economic assessment and core consumer inflation rose to 2.8% in August, as expected.
As BOJ officials were apparently in no hurry to further “normalize” ultra-low rates, the yen weakened to around 144 per dollar.
In Europe on Thursday, the Bank of England, with an eye on the new Labour government's first budget next month, also refrained from making its second rate cut of the year. And that pushed the pound to its best levels since March 2022.
The backdrop in the UK for both the Bank of England decision and the budget was mixed: consumer confidence fell to a six-month low, even though rising retail sales in August beat expectations. However, the fiscal outlook was darkened by news that public borrowing last month was higher than expected, with government debt reaching 100% of GDP for the first time since comparable records began 31 years ago.
On Wall Street, investors were still largely wondering what they didn't like.
The Fed's big cut coupled with news of falling weekly unemployment puts a “soft landing” firmly on track and all stock indexes rose on Thursday, with new all-time highs for the S&P500 and the equal-weighted version of the index that adjusts to the handful of mega-cap leaders.
Both the tech-heavy Nasdaq and the small-cap Russell 2000 hit their highest levels since July.
Both the S&P500 and the Nasdaq are up 20% so far this year. The VIX volatility indicator was below 17 and below the long-term averages.
Fed futures, which price in slightly more easing over the rest of this year than the additional 50 basis points the central bank has signaled, now see 200 basis points of cuts over the next 12 months to 2.9%, where the Fed has signaled its long-term “neutral” rate now sits.
US Treasuries appear comfortable with that, with 2-year Treasury yields hovering near 2-year lows below 3.6% and the newly positive gap in the 2- to 10-year yield curve above 10 basis points for the first time in more than two years.
As for whether the Fed is easing policy too much, inflation expectations have risen a bit but remain just above the Fed's 2% target. Crude oil prices have risen slightly this week, partly due to renewed tension in the Middle East, but year-over-year losses in oil prices are already over 20% from two weeks ago.
With attention focused on other central banks, the dollar index strengthened somewhat from the year's lows.
Stock futures were slightly away from new records before the bell on Friday.
Attention will now likely turn to a group of Federal Reserve officials who will be on the campaign trail over the next week, and who could shed more light on the reasoning behind this week's big rate cut.
The end of the quarter is also approaching and, of course, the November election campaign is starting to heat up.
The latest polls show the two leading presidential candidates virtually tied nationally, although Democrat Kamala Harris remains the slight favorite in betting markets.
Key developments that should provide further direction to US markets later on Friday:
* Eurozone consumer confidence in September; Canadian producer prices in August
* Philadelphia Federal Reserve President Patrick Harker; European Central Bank President Christine Lagarde; International Monetary Fund Managing Director Kristalina Georgieva; Bank of Canada Governor Tiff Macklem; Bank of England Policymaker Catherine Mann; and Bank of England Chief Executive David Bailey speak in Washington
(By Mike Dolan, editing by Kevin Liffey; mike.dolan@thomsonreuters.com)
